Coronavirus Impact on Banking: Wall Street vs. Main Street
One month ago, life was good. Spring was just around the corner. Many people were getting ready for spring break. The dogwoods and azaleas were about to bloom at Augusta National for the Masters. Now, none of that matters. We are living through a chapter or two of a future history textbook. The first thing most people do in times of severe stress is assess the current situation in the context of what’s happened in the past. What’s happened that’s similar to right now and how should I react? Not until the fog of dealing with the current situation clears, do we typically reflect and adjust our approach to life and business.
The easy comparison for today’s reaction to the global pandemic is to compare to 2008/2009 when liquidity in the banking system dried up and Wall Street was about to collapse. While it might feel similar, this time is different, and the discrepancies are key. The stock market selloff, even though painful, has been orderly. As opposed to a collapse on Wall Street, this time we’re experiencing is a collapse on Main Street due to the uncertainty around the COVID-19 virus. It feels unsettling, watching dozens of businesses shut down and seeing the empty shelves at the grocery store. The why behind this behavior goes to human nature. Stocking up makes us feel safe and in control, knowing that you can control how much toilet paper and water you have when so many things are out of your control.
What does all this mean for banking and helping borrowers? The FED has dropped interest rates to near zero so spreads and margins will be tested. Fee income will fall as activity slows. Credit losses will increase. Travel, tourism, restaurants and entertainment will be hit especially hard. In order to find a way forward, bankers must step back and review their policies, processes and technology to help that margin cover lower costs. Getting a handle on where losses are in the portfolio and making sure new credit added to the books meets the risk profile of the bank will require a review of policy, process and technology.
Main Street is all about small business banking and small businesses have unique needs. Frequently, banks repurpose their commercial policy, process and lending technology to handle small business credit origination and portfolio management. This is common, but it is a mistake. We are at a critical time to develop specific product sets to support this client base. Small business loans simply do not demand the customization and structure that middle market commercial loans require, so using a more complex process can considerably delay small business loan decisioning, putting banks at a strategic disadvantage. Instead, bankers should develop dedicated small business products that have streamlined processes by aligning with the simplified requirements of these loans. Small business borrowers need a product set that expedites the application process by requiring limited information while remaining in accordance with a bank’s small business loan policy. By continuing to use commercial policies and processes for small business lending, it will be hard for a bank to generate the efficiencies required to make fast decisions and subsequently, compete with the competition.
Banks should also keep in mind that unlike commercial customers, traditionally, small business owners visit the bank branch personally or manage their banking online. It will be valuable for branch managers and/or small business lending specialists to manage the day-to-day relationships with small businesses customers both in person and virtually.
The COVID-19 has created an opportunity to assess how banks interact and help Main Street. The banking system is sound, unlike 2008/2009. Will there be stress in the industry? Yes, but we need to take this opportunity to put policies, processes and technology in place that will support Main Street and we will come out on the other side of these challenging times better for all.
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Posted on Friday, March 20, 2020 at 9:15 AM
by John Watts